a.Describe and explain the significance of each of the following: payback period, internal rate of return (IRR), modified internal rate of return (MIRR), net present value (NPV), and profitability index (PI). Explain. Provide examples for better clarity.
b.Discuss the notions of conventional and nonconventional cash flows in capital budgeting. Which investment evaluation criteria would you use for unconventional cash flows and why? Provide a fictitious unconventional cash flow example and apply the payback period, NPV, IRR, MIRR, and PI methods to your example. Interpret the results.
Provide your explanations and definitions in detail and be precise. Comment on your findings. Provide references for content when necessary. Provide your work in detail and explain in your own words. Support your statements with peer-reviewed in-text citation(s) and reference(s).
Part 2:
Please answer each of the following questions in detail and provide in-text citations in support of your argument. Include examples whenever applicable. Make sure to provide examples for each of the questions below.
1.Please explain the determining factors of the interest rate and make sure to include hypothetical examples for better clarity.
1.Describe the meaning of the yield curve. Verify how the shape of the yield curve provides predictions on the economy in future years. Please visit the US Governments’ Treasury site, retrieve the data on the U.S. treasury rates and construct the yield curve. Indicate the date of retrieving the data.
2.Please explain the terms associated with the bonds, namely, corporate bond, municipal bond , treasury bill, par value, coupon rate, coupon payment, time to maturity, prevalent interest rate, market value and yield to maturity (YTM).
3.Explain and provide examples of how variations in the prevalent interest rate affects market value of a bond.
4.Explain how you would value a stock. Provide an example of valuation of a stock based on retrieved real data. Include evidence of the retrieved data in your answer. Compare your valuation with the actual price of the stock at the designated time for your valuation.
1.Two bonds A and B have the same credit rating, the same par value and the same coupon rate. Bond A has 30 years to maturity and bond B has five years to maturity. Please demonstrate your understanding of interest rates risk by answering the following questions :
Discuss which bond will trade at a higher price in the market
Discuss what happens to the market price of each bond if the interest rates in the economy go up.
Which bond would have a higher percentage price change if interest rates go up?
Please substantiate your argument with numerical examples.
As a bond investor, if you expect a slowdown in the economy over the next 12 months, what would be your investment strategy?
2.Familiarity with random variables is essential to understand the basics of portfolio theory. Given that CLA2 assignment is about portfolio formation, you need to strengthen your skills in dealing with random variables. Please review and explain the significance of basic concepts about random variables, namely, the mean, the variance, the standard deviation, and the correlation.
Sample Solution
